A computation that factors both price and traded quantity to arrive at a weighted average price. This calculation is particularly useful in finance to determine the average price paid for a security over a given period, weighted by the amount traded at each price. For example, if 100 shares were purchased at $10 and 200 shares at $12, the resulting weighted average would reflect that a larger portion of the investment was made at the higher price.
The employment of this metric offers a more accurate reflection of the average cost basis than a simple arithmetic average. Its significance lies in providing a clearer understanding of trading activity and price trends, enabling more informed decision-making in investment strategies and risk management. Historically, its application has grown in parallel with the increased sophistication of financial markets and the need for precise analytical tools.
